Challenges and Trends in
the Dairy Industry

Milk is big business in Ontario as it is the largest sector of
agriculture with $1.7 billion in milk receipts making up 20% of
the provinces agricultural production. Ontario currently has
4,200 producers with the average herd size close to 76 cows. These
producers spent just over $1.5 billion last year in their local
communities which magnifies the importance of the industry.

The dairy sector like many commodities is going through some major
changes. The question many producers are asking is - what must I
do to stay competitive in the industry? At present the majority
of new barns being constructed in Huron and Perth Counties are free
stalls with capacity to house and milk over 100 cows. The trend
is very obvious - larger herds and fewer farms! However, this does
not necessarily mean the "downfall" of smaller family
farms. Producers who are making a long term commitment to the industry
should be aware of the four major factors that can influence survival
and profitability:

Production Efficiencies

Cost Control

Scale of Operation

Debt

The secret for success is to focus on all of the factors that affect
profit and strive towards the balanced approach, including quality
of life style.

Profit in its simplest form can be defined as (price - cost of
production) x volume. This formula can be used as a tool to help
evaluate the FINANCIAL HEALTH and FUTURE DIRECTION of a dairy operation.

What makes some farms more profitable?

Price - Milk and subsidy revenue/kg of quota can vary greatly
from one farm to the next. Altering the protein/fat ratio can
influence returns/kg of quota. Tighter profit margins plus high
quota values will force producers to maximize returns from their
quota holdings. Milk revenue accounts for approximately 85% of
the total revenue on most dairy farms.

Cost of Production (C.O.P.) - Again, there is a tremendous range
in cost of production to produce a litre of milk. Producers should
track the performance of each enterprise such as dairy, herd replacements
and crops to determine what segment of the operation performs
best. Well managed, low cost operations will be better positioned
to compete in the future. Apply the 60% Rule - total expenses
less depreciation and interest payments, ideally should be less
than 60% of revenue. The Ontario Farm Management Analysis Project
is a good program to show where expenses may be out of line.

Volume - Aim to produce large volumes of milk both per cow and
per person. Strive for a herd average milk production level that
is at least 10% or more above provincial average. Efficient production
of milk can be summed up in one statement - Maximize dry matter
intake. Identify bottlenecks restricting intake and correct them.

As we near the turn of the century, many challenges and uncertainties
face producers:

tighter profit margins

new technology

future of supply management and quota values

increasing demands on net farm income (particularly family living
costs)

When reviewing personal, financial and production goals, producers
should always be reminded of future challenges facing the industry.

Because of the large capital investment required in the dairy industry
today, it is important to be a good money manager. Use capital wisely
by analyzing all major changes to a business and only make changes
based on realistic cashflow projections. Apply the sensitivity rule
- can your farm handle a 5% drop in revenue and a 5% rise in expenses?
Debt is not necessarily bad, but make sure its manageable.

In summary, the dairy industry is highly productive, very efficient
and a large part of the economy. I believe producers who are willing
to adapt to change have good reason to be optimistic about their
future.

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